Billabong Falls on Concern Profit Outlook May Lower Bid

By David Fickling -
Dec 19, 2012

Billabong International Ltd. (BBG) fell
the most in two months amid investor concerns Sycamore Partners
LLC may lower a A$527 million ($554 million) takeover bid after
the company cut its earnings forecast by as much as 49 percent.

The stock slumped 23 percent below the A$1.10 a share
offered by Sycamore, which sources clothing for Victoria’s
Secret owner Limited Brands Inc. (LTD), and Paul Naude, the head of
Billabong’s Americas division. Details of the bid were disclosed
by the Gold Coast, Australia-based company today alongside the
lowering of its profit forecast.

Three private equity approaches for Australia’s largest
surf-wear maker have already been rejected or scrapped this year.
The company recorded its first annual loss since a 2000 listing
this year as it sold stock at a loss to clear shelf space, paid
penalties to break store leases early, and cut the value of its
brands by A$343 million.

“I’d have no confidence that the A$1.10 offer is going to
be achieved,” Tony Wilson, an analyst at Evans & Partners Pty.,
said by phone from Melbourne. “They’ll look at the books, do
their homework on the different businesses, and figure it’s all
too hard. The whole thing is just such a chaotic mess now.”

Offer Unchanged

Naude wrote to Billabong after it cut its forecast today to
confirm that the offer was unchanged, the company said in a
second regulatory statement. A condition that the bid be kept
confidential was dropped, after publications including the
Australian Financial Review and Bloomberg LP reported details.

“The trading update shouldn’t be a complete surprise to
Naude,” said Grant Saligari, an analyst at Credit Suisse Group
AG in Melbourne. “Still, it means you certainly wouldn’t see
any reason for a bid higher than A$1.10.”

Billabong shares fell 13 percent to close at 85 Australian
cents in Sydney trading, their biggest drop since Oct. 12.

The latest bid values Billabong at less than 14 percent of
its peak market capitalization of A$3.8 billion in mid-2007, and
little more than half the A$1.02 billion value that founder
Gordon Merchant said in February he’d turn down if TPG
International LLC, which had made a takeover approach, offered
it.

Expectations for group profit have shrunk sharply amid
consumer sentiment that’s been negative for 10 out of the past
12 months in Australia, even as interest rates have been cut to
record lows.

Forecast Lowered

Weaker-than-expected sales over the past six weeks,
traditionally the busiest period for retailers, as well as
restructuring costs will push down earnings before interest, tax,
depreciation and amortization this year to between A$56 million
and A$63 million, the company said today.

In October Billabong forecast Ebitda of as much as A$110
million, and the average of 13 analysts’ estimates compiled by
Bloomberg 12 months ago came to A$245 million. Billabong will
also review the value of its assets, the surf-wear maker said, a
process that may further reduce profit.

Naude, who’s headed Billabong’s largest division by sales
since 1998, temporarily stepped aside as a director on Nov. 19
to pursue the leveraged buyout. The South African owns about 0.2
percent of Billabong’s stock, according to data compiled by
Bloomberg.

Professional Surfer

He won his country’s championship board event while working
as a professional surfer in the 1970s, and headed the Laguna
Beach, California-based Gotcha brand’s South African unit in the
1980s before joining Billabong, according to the book, Greg Noll:
the Art of the Surfboard.

Sycamore’s $369 million bid for Talbots Inc. was accepted
by the Hingham, Massachusetts-based women’s clothing retailer’s
board in June. Sycamore also acquired a 51 percent stake in Mast
Global Fashions, the apparel-sourcing division of Victoria’s
Secret owner Limited Brands, in November 2011.

Billabong’s board will consider the conditional bid and
told investors in today’s statements to take no action in the
meantime. The offer is subject to due diligence, regulatory
approval and completion of financing from a group led by Bank of
America Corp.’s Merrill Lynch unit, the company said.

“I understand the concerns of shareholders,” Chairman Ian Pollard said in the statement. The company “has been seeking to
manage volatile and at times unprecedented trading conditions in
all markets,” he said.

The latest offer would price Billabong’s debt and equity of
A$688 million at about 11.6 times the median of its latest
forecast Ebitda. That compares with a median of 14.8 times
Ebitda in 16 takeovers of clothing companies worth more than
$100 million over the last five years.

Valuation Differences

“There’s a lot of vagaries in the valuation of
Billabong,” Credit Suisse’s Saligari said. Analysts have target
prices ranging from A$1.60 to 41 cents.

TPG, the private equity company owned by David Bonderman,
pitched four different offer prices to Billabong this year from
A$1.45 to A$3.30 before walking away in October without giving
reasons.

An unnamed bidder, which people familiar with the matter
identified as Bain Capital LLC, dropped an offer in September
after carrying out due diligence.

Michael Freitag, an external spokesman for Sycamore at
Joele Frank Wilkinson Brimmer & Katcher, didn’t respond to a
mobile-phone message seeking comment left after business hours
in New York.